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                              How to Make Money All the Time




                                   JAMES SkInnEr
                                   rOICE krUEgEr
                                 MArk VICtOr HAnSEn
www.youpublish.com /ideas   Ideas That Can Change Your Life                           ™   in Business




                                          Chronic Profitability
                                            How to Make Money All the Time


                            James Skinner, Roice Krueger, and Mark Victor Hansen




                            “Chronic Profitability” shows you how to build a
                            company that makes money all the time no matter
                            what, all because of one simple shift in focus.


                            ___________________________________________
                            Give this book to anyone you know who runs a
                            business and wants to make more profit!
                            www.youpublish.com/ideas
                            __________________________________________



                            © 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 1
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                            The Authors
                            JAMES SKINNER is the founder of two global financial
                            groups that manage billions of dollars of assets. He is
                            also recognized as one of the world’s foremost business
                            thinkers and appears regularly on Japanese television.


                            ROICE KRUEGER co-founded Franklin Covey, the
                            world’s largest training company, and has supervised
                            consulting projects for 80 percent of the Fortune 500.


                            MARK VICTOR HANSEN is the co-creator of the Chicken
                            Soup for the Soul empire and is the best-selling nonfiction
                            author of all time. His goal is to make the planet work
                            for all humanity!


                            NOTE: Ideas That Can Change Your Life™ is a
                            collaboration of three of the world’s most amazing
                            authors, speakers, and thinkers. In this book, the first
                            person “I” may refer to any of the authors.


                            To contact the authors for keynote and other
                            speaking engagements: speaker@youpublish.com




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                            Chronically Profitable
                            The word chronic usually makes you think of sickness, so
                            it catches your attention. How many of you want to be
                            chronically profitable, meaning that you make a profit all
                            the time, no matter what?


                                A chronic disease is a disease that does not go away
                            no matter what you do. I want all of your companies
                            and all of your businesses to be so profitable that you
                            can’t get the profit to go away no matter what you do.
                            Would that be good, would that be great, and would
                            that be extraordinary? Say yes!


                                  You want your company to be so profitable that
                                  it makes money all the time no matter what!


                                 This is called how to make money all the
                            time—every single month of your business life, no
                            matter what. We want to make you so profitable, that if
                            you say “I don’t want to be profitable this month,” we
                            would say, “So sorry. There is nothing we can do about
                            it. You are going to be profitable anyway.” Do you like
                            that?



                            © 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 3
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                            Fixed Costs and Variable Costs
                            I was the first non-Asian to ever be certified as a
                            management consultant in Japan. We spent a lot of time
                            studying traditional management theory. In traditional
                            management theory you talk a lot about costs. How
                            many of you have ever heard about costs? That is the
                            money that you spend doing your business.


                                      Costs are the money you spend doing your
                                                     business.


                                When we study costs, we talk about fixed costs and
                            variable costs.


                               A fixed cost is a cost that you incur whether you
                            conduct any business or not.


                                     A fixed cost is something you have to pay
                                    whether you conduct any business or not.


                                 If you have rented an office, that is a fixed cost.




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                                It does not matter from the property owner’s
                            perspective whether you do any business or not; they are
                            going to charge you rent.


                                If you hire an employee and they are on a salary,
                            then their salary is a fixed cost. Whether you sell
                            anything or not, you still have to pay it.


                                 We have many things that are fixed costs.


                                We also have variable costs. A variable cost is a cost
                            that is only incurred when we actually do business.


                                 A variable cost is something you only have to
                               pay when you conduct business or make a sale.


                                 For example, if I make a shirt for a customer, then
                            the material cost is a variable cost. It is only incurred if
                            we are actually making shirts. For each shirt that we
                            make we incur a new variable cost. If we have
                            outsourced the tailoring to somebody else, then the
                            tailoring costs are a variable cost. It is incurred only
                            when we make a sale.



                            © 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 5
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                            The Break-Even Point
                            Every business has two kinds of costs: F (fixed costs)
                            and V (variable costs).


                                 In traditional management theory, when we want to
                            find out how healthy a company is we calculate what is
                            called the break-even point. We are going to call that the
                            BEP.


                                  The break-even point tells you what level of
                              sales you need to achieve to break even (not lose
                                                any money).


                                 We are going to give you a formula here: Don’t be
                            too concerned if you don’t understand it right away. We
                            will make it very simple for you in a minute.


                                                          BEP=F/(1-V/S)


                                What this means is that the break-even point of any
                            company is equal to the fixed costs divided by 1 minus
                            the variable costs divided by the sales.



                            © 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 6
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                                You can look at your financial statements and see
                            what those costs are and what your current level of sales
                            is.


                                What this actually means is that if you divide the
                            fixed costs by the percentage of profit on each sale, you
                            find out how many sales you have to make in order to
                            be profitable.


                                  Your fixed costs divided by the percentage of
                               profit on each sale equals the break-even point.


                                 Let’s do a really simple example.


                                Say we have a company that has fixed costs of $50.
                            In other words they have $50 of costs that they incur
                            whether they do anything or not—rent, fixed salaries,
                            and equipment leases, and so on.


                                Now let’s say that for every dollar the company sells,
                            they have to spend 20 cents in variable costs. In other



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                            words, they pay 20¢ on material, sales commissions, and
                            so forth that are only paid out if the company actually
                            sells something.


                                Therefore, their variable cost ratio is 20 percent, or
                            to put it another way, they have a profit ratio of 80% on
                            each sale made.


                               One (one hundred percent) minus 20 percent gives
                            you 80 percent, so the profit margin on each is 80%.


                                                            1-20¢/$1=0.80


                                 To calculate the break-even point, all we have to do
                            is divide $50 (the amount of fixed costs) by 80% (the
                            profit margin on each sale).


                                 The break-even point for this company is $62.50


                                                      $50/(1-20¢/1$)=$62.50




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                                If this company has sales of $62.50, then they will be
                            profitable and can pay their fixed costs and their variable
                            costs. That is their break-even point.


                                Any sales less than that will be a big problem, and
                            any sales after that will make them money; and since the
                            profit ratio is quite high, they are going to do quite
                            nicely if they sell more than $62.50.


                               So what does all this mean in terms of actually doing
                            your business?


                            Improving Your Break-Even Point
                            What this formula tells us is that if you want to have a
                            very good business, you want the break-even point to be
                            very low. Then you don’t have to get that many sales
                            before you start making money.


                               If you have to have a lot of sales before you start
                            making any money and the economy starts to go down,
                            what happens? You are not making any money anymore.




                            © 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 9
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                                As management consultants, we love companies that
                            don’t have to work very hard to be profitable. Would
                            you like a company that does not have to work very
                            hard to be profitable?


                                To achieve that, what you need to do is decrease
                            the fixed costs.


                                If you can take your fixed costs and turn them into
                            variable costs, your break-even point will go down.


                                    Converting fixed costs into variable costs will
                                        improve your break-even point!


                                If you have no fixed costs, what is your break-even
                            point? Zero! So that makes it very simple. If you do not
                            have any fixed costs, you can’t lose any money. If you
                            just sit there and don’t do anything, you are not losing
                            any money. Now you know why everybody is doing
                            what? Outsourcing.


                                  Outsourcing converts fixed costs to variable
                             costs improving your company’s break-even point!



                            © 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 10
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                                When you outsource rather than pay somebody
                            in-house to do it, which is a fixed cost, whatever it is
                            now becomes a variable cost. Therefore, if your sales go
                            down, you are still profitable.


                               I studied this as I was becoming a management
                            consultant. It is important to understand this formula
                            and know your break-even point. You want to stick the
                            formula on your wall and periodically calculate what
                            amount of sales your company needs to generate to stay
                            profitable.


                                Can your sales go down before you drop into the
                            red? If our sales drop 1 percent, 5 percent or even 20
                            percent, are we still profitable? It is good to know that
                            your sales could drop 50 percent and you would still be
                            making a profit.


                                Your banker would also like to know your
                            break-even point, as would your shareholders.




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                                   Periodically calculate the break-even point for
                                                 your company!


                            From Costs to Sales!
                            However, what I started to realize, as I consulted with
                            many companies and taught them how to do this, was
                            that everybody was talking about costs and nobody was
                            talking about sales. I thought, “Hmmm…. that is
                            interesting because as an owner of businesses, I am very
                            concerned about satisfying our customers, making them
                            happy, getting them to buy something from us, and
                            meeting their needs, in other words, SALES!”


                                That is the reason we are here in the first place.
                            What if we started to study sales at the same level we
                            studied costs?


                                I came up with a new idea called fixed sales. Then I
                            came up with an idea called variable sales. I thought,
                            “What if we not only thought of our costs as being fixed
                            or variable but also started looking at our sales and split
                            them into fixed and variable sales?”




                            © 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 12
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                                   If costs can be both fixed and variable, so can
                                                     SALES!


                               A fixed sale is a sale that you do not have to put any
                            work into to generate. It comes in like clockwork
                            whether you do anything or not.


                                 Fixed sales are sales that take place whether you
                                              do anything or not!


                                Is having automatically generated sales a good thing
                            or a bad thing? It is an extraordinary thing, and you
                            want to make sure that you have lots of sales that
                            happen no matter what.


                               Variable sales, on the other hand, are the sales that
                            you have to go out and work for.


                               Every month you have to go out and wear down
                            your shoe leather, and wear out your ear and your
                            mouth getting somebody to buy.




                            © 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 13
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                                 Variable sales are sales that you have to work for
                                                   each time.


                                Are variable sales a good thing or a bad thing? They
                            are a good thing! Sales are always a good thing. You do
                            not want to get that confused look and go back to the
                            company and say that you found that variable sales are a
                            bad thing so we are stopping all our variable sales now.
                            Don’t do that! All sales are good.


                                But if you had your choice, would you rather have
                            fixed sales or variable sales? Fixed sales, of course.


                                   All sales are good—fixed or variable, but fixed
                                                  sales are better!


                            Calculating Chronic Profitability
                            From this simple idea, I developed a formula that
                            calculates Chronic Profitability.


                                                     CP=FS*(1-VC/TS)-FC


                                 CP=Chronic Profitability



                            © 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 14
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                                 FS=Fixed Sales
                                 VC=Variable Costs
                                 TS=Total Sales
                                 FC=Fixed Costs


                               What this means is Chronic Profitability is equal to
                            your fixed sales times your profit margin on each sale
                            minus your fixed costs.


                               You want to study this and get used to calculating
                            your fixed sales and the profit margin on those sales,
                            and then and subtracting your fixed costs. That tells
                            you your level of Chronic Profitability.


                            What to Actually Do!
                            Would you like to be chronically profitable? There are
                            only three things that you can do to make it happen.


                                The formula is nice, but it can get complicated and
                            tied up in your brain; and besides, you only need to
                            know what to actually do.


                                 Would that be useful?



                            © 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 15
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                                If you do or if you don’t get the formula, you’re still
                            going to get the result.


                                   Even if you don’t understand the formula, you
                                       can still get the result you want!


                                Chronic Profitability is something I like to establish
                            immediately in every company I ever own. I can go on
                            vacation, I know the sales are coming in, the margins are
                            there and it is a done deal.


                               Here are the three things you can do to be
                            chronically profitable:


                            Step 1: Decrease Your Fixed Costs
                            The lower your fixed costs, the higher your Chronic
                            Profitability. Therefore, you want to start thinking about
                            ways to decrease your fixed costs.


                                Reducing fixed costs is a good thing. It lowers your
                            break-even point and improves your Chronic
                            Profitability.



                            © 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 16
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                                The whole trend of the economic world today is that
                            fixed costs are dead.


                                In our e-book business, we have just two fixed costs:
                            the servers and our web master. Everything else is
                            variable.


                               We know that if we can keep fixed costs low, we will
                            always be Chronically Profitable.


                            Step 2: Increase the Profit Margin on Each Sale
                            Even if it is a fixed sale, it still has to be a profitable sale.
                            Having fixed sales that you lose money on does not
                            generate Chronic Profitability. It generates chronic
                            losses.


                                You have the fixed costs you want to go down and
                            the profit margin you want to go up. You want a higher
                            margin on each sale.


                                 This part is not complicated.




                            © 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 17
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                            Step 3: Increase Your Fixed Sales
                            You now know what to do. You decrease fixed costs,
                            and you improve your profit margin on each sale. The
                            next part, however, is key. I could be a televangelist on
                            this next part.


                                We have created what we call the “suffering ratio.”
                            The amount you suffer every month at work is equal to
                            your variable sales divided by your total sales—in other
                            words, the proportion of sales that you need to make
                            again every month.


                                          Suffering=Variable Sales/Total Sales


                               You worked all last month, finally got some sales,
                            and then you have to go out and do it all over again!


                                   That is called suffering.


                                The opposite of suffering is your “ecstasy ratio.”
                            Now, your ecstasy ratio is equal to your fixed sales
                            divided by your total sales.




                            © 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 18
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                                             Ecstasy=Fixed Sales/Total Sales


                               That means that I already did it so I don’t have to
                            show up anymore.


                                How many of you are starting to like this idea? Is
                            this triggering some thinking in your brain about how
                            you may want to change your business?


                            Lots of Ways to Get It Done
                            Now we are going to go through each of the three steps
                            in sequence. We are going to give a whole bunch of
                            ideas about ways you can make Chronic Profitability
                            happen in your business. Would that be useful?


                                What you need to know is how to do it in your
                            business right now, because you are no longer in
                            business school; you are in business reality.


                            Getting Rid of Fixed Costs
                            The first thing I want to focus on is fixed costs. What
                            are some ways that you can get rid of your fixed costs?




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                            You thought I was going to teach you. Now you actually
                            have to think for yourself.


                                So how can you get rid of your fixed costs? What
                            can you do?


                                 You can outsource.


                                I want you to write down on paper, “Outsource
                            everything, including yourself.” You think I am joking.
                            How do you outsource yourself? You can become a
                            vendor that provides services to your company on a
                            contract basis instead of being an employee.


                                 It is not just other people who can be vendors; you
                            can be a vendor. I believe that in the future, everyone
                            will be an independent vendor. We are moving from a
                            dependent paradigm to an independent and
                            interdependent paradigm.


                                  In the future, every individual will be his or her
                                                  own business!




                            © 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 20
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                               The dependent paradigm is the paradigm of parent
                            and child, which says, “I will take care of you, but you
                            must do what I say.”


                                This is the traditional paradigm of the
                            employee/employer relationship. Do you know what
                            they call the employee/employer relationship in the law?
                            The law of masters and servants. Is that shocking? That
                            is what it is called.


                                We are moving away from a masters-and-servants
                            paradigm.


                                The reason is that companies can no longer be the
                            parent, because of global competition.


                                The fact is technology is advancing so rapidly that
                            entire industries now become irrelevant and companies
                            can no longer guarantee they will be able to take care of
                            you forever.


                               Industry says, “You know we can work together
                            while it is profitable to do so, but I don’t know what is



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                            going to happen three years from now. I really don’t.
                            We could be in the business of making whips and
                            buggies, and somebody could invent an automobile. We
                            could become completely irrelevant, and in this case I
                            can’t take care of you.


                                So now we need to be independent. You need to be
                            able to take care of yourself. But we can work together,
                            which is called interdependency. We can work together
                            while it is profitable for us to do so. We are moving to a
                            different paradigm.” So we are all outsourced.


                                   You need to be independent, because now we
                                              are all outsourced!


                                Let me put this to you in just a little different way
                            and build on it. This is a powerful phenomenon
                            happening throughout the world. If the company is the
                            parent and the parent is becoming less stable, then the
                            child cannot depend on the parent, so the child must
                            quickly become independent, meaning that they can
                            provide for themselves. The company is required to
                            outsource, and the child must become independent.



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                                Yes, we all must become adults very, very quickly
                            now. We must become economical adults who are able
                            to be responsible and work together in a responsible
                            manner. The social contract has shifted, for better or
                            worse.


                                 I am merely describing the world as we work and
                            live in it. Personally, I believe that it is a good thing
                            because it causes us human beings to grow instead of
                            forcing other people into dependency. I happen to like
                            the paradigm that says “I have to earn my keep.” I am
                            good with that. But I am not going to make a moral
                            judgment on it overall. I understand that there are many
                            social issues involved.


                                         We all must become economic adults!


                                Now what other ways can you reduce your fixed
                            costs?


                                 Outsourcing is not the only way.




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                                 Think hard.


                               You can reduce your rent, downgrade your offices.
                            Eeeewww! you might say.


                                You know, Peter Lynch, one of the greatest stock
                            investors of all time, says that when he goes to visit a
                            company and it is in very flash offices, he runs for the
                            door.


                                 Why?


                               Because they are not going to be chronically what?
                            Profitable.


                                They have got to work really hard just to pay the
                            rent.


                                You are not in the business of making your landlord
                            wealthy. You are in the business of making you and your
                            shareholders and your employees wealthy.




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                                That is another way to decrease fixed cost. How else
                            can you do it?


                                Lease instead of buy? Nice try. See, everybody
                            thinks leasing is a V, but it is actually an F. You are tied
                            to that contract, so it is a fixed cost. You can pretend
                            that it is variable, but guess what? It has to be paid every
                            month.


                                When I set up my last company in Japan, I would
                            not let the employees purchase or lease a copy machine.
                            I told them that every time they wanted to make a copy,
                            they had to go to 7-Eleven. Now that is a variable cost.


                               Every time that they wanted to make a copy, they
                            had to put a coin in the slot. Guess what? They didn’t
                            make very many copies.


                                 Seriously.


                                That is called driving fixed cost all the way out.
                            Does that make sense? Use equipment that is used only
                            on a when-needed basis: That is variable cost.



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                                How else can you get rid of your fixed costs? You
                            can downsize and get rid of all your fixed costs entirely.
                            Which fixed costs? Salaries. So what is a way you can
                            take a fixed salary cost and turn it into a variable cost?
                            You can pay your people in stock options—which are
                            only going to be valuable if your people make you a
                            bunch of money. Or you can give them a commission or
                            a percentage of profits. You can create a larger bonus
                            pool and a lesser salary, but then the bonus pool
                            depends on the profits. So unless you are profitable, you
                            don’t have to pay them. Would that increase your
                            Chronic Profitability, yes or no? Yes. You need to have
                            many ways to do it.


                                              Drive fixed costs all the way out!


                            Improving Your Margin
                            Now let’s look at improving your profit margin.


                                There are many ways to do this. What are some of
                            the ones you can think of?




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                                 Increase the prices. That is a really terrific one. Does
                            it actually work? It does. There are some products that
                            will sell better when the price is raised. It is really
                            interesting. You increase the price and more people
                            want to buy.


                               You want to find your ideal price point that gives
                            you the maximum margin you can get.


                                Here is an example: In 1984 Tony Robbins put
                            together his Personal Power® infomercial with my first
                            client, Bill Guthy. Bill tested the price point at $89, $129,
                            and $179. They sold more at $179, because there was a
                            higher perceived value. If you want Personal Power®,
                            that’s what you paid; today the product sells millions of
                            copies a year worldwide. It is important that you check
                            the price by what the client thinks the value is.


                               What else can you do to improve the margins? If
                            you don’t know, I am concerned. Aren’t these the
                            questions you need to be asking yourself every day?




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                               One way to improve margins is to improve the
                            quality.


                               Now I want you to understand that improving the
                            quality is very profound, because improving quality does
                            what to costs? It reduces the costs. You need to
                            understand this: Higher quality costs less!


                                                   Higher quality costs less!


                                 This is the one single paradigm shift that Deming
                            taught the Japanese that created the entire postwar
                            economical miracle. He went in and said, “I am going to
                            tell you the big secret.” They said, “What is that?” He
                            said, “The big secret is higher quality costs less.” They
                            all fell out of their chairs.


                                Now, Deming wouldn’t do any seminar that didn’t
                            have 500 CEOs in the room. If the CEO wouldn’t come,
                            he wouldn’t let anybody in the company come. He said
                            that otherwise it was a complete waste of because they
                            needed to change the whole management paradigm.




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                                He said higher quality costs less because, number
                            one, you don’t have to process the claims. Claim
                            processing is devilishly expensive and time consuming.
                            Number two, no rework. Devilishly expensive. Number
                            three, less marketing costs. Because, if it is higher quality,
                            you start to get word of mouth and you start to drive the
                            marketing cost outside the organization instead of inside.
                            Lower selling cost, lower marketing cost, less rework.
                            And less waste—because when you start to drive quality
                            into a process, you waste fewer materials. It actually
                            drives the cost down.


                                Not only does it bring the price point up, but you do
                            it while driving the cost down. Does that make sense?


                                So the formula for success, since we are doing a
                            formula-based discussion here, is very interesting. This
                            is what the very best companies do.


                                They take the quality and raise it up. And when they
                            raise the quality, what that does that do to the cost? The
                            cost goes down. And when the cost goes down, what
                            happens to the profitability? It goes up. And when the



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                            profitability goes up, what does the company do with
                            the profitability?


                                The first thing they do is invest in higher quality.
                            The second thing they do is give the customer a lower
                            price, out of the increased profitability. And the third
                            thing they do is reward their employees, their
                            shareholders, and all the other stakeholders in their
                            business with a larger dividend.


                                Can anybody say TOYOTA? This is how they do it.
                            They drive the quality up, which drives the cost down,
                            which increases the profit margin, which allows them to
                            give a lower price, even-higher quality, and a bigger
                            shareholders’ dividend. Start doing this for a couple of
                            years and nobody will be able to catch up.


                                             Quality     Cost    Profit
                                       Profit     Quality + Price + Profit

                               How else can you improve the margins? You can
                            negotiate better terms of business with your suppliers. I




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                            am not only talking about price, although part of it is
                            price.


                                In the value equation, you have four elements:
                            quality, cost, delivery, and service, or QSDC. So,
                            getting a better delivery schedule can allow you to drive
                            down your inventory, which will improve your margin
                            and return on capital.


                                 Also, you can improve your operational efficiency.


                                 I started out as an industrial engineer. One of the
                            first factories I went to was an automotive parts factory.
                            I followed the forklifts around for two days. This
                            factory was having one forklift accident a week. Does
                            that drive any cost into your business? Yes. Not to
                            mention the fact that they drove forklifts all over the
                            factory, which did not add value. It is a non-value-added
                            process.


                                We created a whole new layout for the factory and
                            got rid of most of the forklifts just by following them
                            around and finding out how things really needed to



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                            move through the factory. The factory radically
                            improved its operating efficiency.


                                Here’s another example. Say an employee is doing
                            one process that is taking 20 seconds. The guy next to
                            him is doing a process that takes 40 seconds. What you
                            do is get two people doing the process that takes 40
                            seconds and you get twice the output by increasing the
                            manpower by only a third. There are all sorts of things
                            you can do to increase the operating efficiency.


                                Another thing you can do is decrease waste of all
                            kinds. Decrease waste in time, materials, and energy. All
                            these things will improve your margin.


                            Creating Fixed Sales
                            Now for the big one (a little drum roll please): We have
                            decreased the fixed cost. We have improved the margin,
                            and now we want to increase the fixed sales.


                                Let’s talk about some different ways you can create
                            fixed sales in your organization. Remember that fixed




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                            sales lead to Chronic Profitability—making money all
                            the time no matter what.


                               Without the fixed sales, it doesn’t matter what you
                            multiply or subtract at the end; you are not going to
                            have the Chronic Profitability that you desire.


                                 Now we are at the crux of the equation.


                                 How do you get fixed sales?


                                Contracts. You can have ongoing purchase order
                            agreements that they are going to purchase $X amount
                            from you every month. It then becomes a fixed sale.
                            Using our training company as an example, we built
                            training programs that were integrated into
                            organizations as part of their systems. Whenever a
                            manager was promoted, they had to go through our
                            training. That is a fixed sale. We knew they were going
                            to come in every year. When it gets to be promotion
                            time, those guys are going up the ladder and we are
                            getting the order. Is that good or is that good? That is
                            good.



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                                You want to start looking into ongoing purchase
                            agreements or how to get yourself systematized so your
                            products and services are part of the system of your
                            client.


                                What other kinds of things are fixed sales?
                            Exclusivity. You have an agreement that they purchase
                            exclusively from you, and you know that they have to
                            purchase.


                                 What else?


                                 Word of mouth? Word of mouth is not a fixed sale;
                            nice try. Word of mouth is not a fixed sale because you
                            don’t know if it is going to happen or not. It is nice. I
                            like word of mouth. Word of mouth is better than
                            having to do it myself, but it is not fixed. I want
                            something that I can put a number on, and I know what
                            is coming in.


                              Subscriptions. Yes! Yes! Yes! Subscriptions.
                            Memberships. Do you know that if everybody who has



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                            a membership at your sports club actually showed up,
                            the club would be toast? But they get those
                            memberships, and they take money out of the bank
                            account every month. They get $80, $100 a month out
                            of the bank account whether you go to the sports club
                            or not, and they don’t have to sell you anymore. That
                            stuff just keeps coming. It is a fixed sale.


                                What else? How about multilevel marketing? Only
                            certain parts of multilevel marketing become fixed sales.
                            I am going to give you the operative word that can be
                            used in multilevel marketing: “auto-ship.”


                                “Auto-ship” means that we are going to ship this
                            product to you every single week or every single month,
                            depending on the periodicity of the product. We do not
                            need a new order from you; you have ordered an
                            “auto-ship.” It comes; we charge your credit card.
                            Everybody say “Auto-ship.”


                                How else can you get a fixed sale? Joint ventures?
                            Partnerships? What kind? I have had a lot of




                            © 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 35
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                            partnerships that did not generate me any fixed revenue.
                            Licensees and franchises. Yes. Everybody say “yes.”


                                 Let me give you the profit margins on franchises.
                            This is what you really need to know. I used to manage a
                            franchise business and for every dollar that we brought
                            in, our fixed cost was six cents. You like the margin?


                                So franchising and licensing is an awesome business.
                            Now sometimes you are not going to get that same ratio.
                            If you are not getting that same ratio, you need to hire
                            Roice as a consultant. But you can get your margin to at
                            least 40 percent. You ought to be looking at 40 percent
                            coming in.


                                In our case we would create a training program and
                            nurture it, develop it, and make it grow in the United
                            States. We created a profitable model and would just
                            wait for the telephone to ring, because people would call
                            up and say, “We would like to represent your product in
                            our country.” We didn’t have sales costs because we
                            didn’t have out looking for licensees. We did have some




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                            legal cost involved, which I guess is a variable cost in
                            this case because you do that each time.


                                So you would have a one-time variable cost. In your
                            company you might have a product that you would ship
                            out, which could also be a variable cost. But what we
                            would do in our case was outsource, so the companies
                            could actually produce the materials in their country.
                            They didn’t have to buy them from us, and they simply
                            sent us a royalty check. Then what we would have is an
                            accounting cost and we would have a service cost of the
                            individual on telephone and so forth. You could work
                            on that type of margin.


                                 In one organization, I decided to completely
                            outsource myself from them. I said, “Look, I have such
                            a profitable model, why don’t you just pay me a
                            percentage of that profit?” So I licensed to the company
                            to license for them. Got it? Then I just developed an
                            income stream. I said, “Not only do I want that income
                            for the time that I am working with you, but when I
                            retire I would like to have it five years in the future.”




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                            And they bought the deal. Got it? This is a powerful
                            concept.


                                 Think licensing. It is what I call the multiplier effect.
                            It is how to multiply your organization and what you are
                            doing.


                                In Chicken Soup for the Soul—we became inundated
                            with people who wanted to license with us because our
                            name is a brand. This is why I said your title is
                            everything in a book or a product or a subject.


                                For example, Diamond Pet Foods came to us. I do
                            not make the pet food or anything, but we get 15
                            percent off the top on the $2 million sales a month this
                            company makes. That is $300,000. Jack gets half: 7.5
                            percent. I get 7.5 percent. This is a pure-profit business.
                            I could retire just on that.


                                We just gave you another $1 million in value from
                            these ideas!




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                               There are many levels of licensing. Licensing is a
                            young business. The first guy in licensing was Walt
                            Disney. He started licensing the Disney characters and
                            images.


                                Then there’s George Lucas and Steven Spielberg
                            Lucas said to Spielberg, “We ought to be licensing all
                            that stuff you are doing with E.T.” Look what happened.
                            In Spielberg’s book he says he made $800 million on
                            E.T. and $1.5 billion on licensing.


                                Bottom line: You have rentals, interest, annuities,
                            and trail fees on introductions. You can generate all
                            kinds of fixed sales.


                            Summary: All You Need to Know
                            So that is basically all you need to know. You have to
                            lower your fixed costs. You have to improve your
                            margins. You have to increase your fixed sales. And
                            you will be chronically profitable.


                               You need to work on it and find lots of ways to do it.
                            You want to have lots of ways to reduce your fixed costs,



                            © 2007, James Skinner, Roice Krueger, and Mark Victor Hansen, All rights reserved. 39
                            Ideas That Can Change Your Life                             ™   in Business


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                            lots of ways to improve your margins, and lots of ways
                            to generate fixed sales that come in every day, every
                            week, every month, and every year. Because you want to
                            have lots of Chronic Profitability to minimize your
                            suffering and maximize your ecstasy!


                            With best wishes,


                               James Skinner, Roice Krueger, Mark Victor Hansen


                            ___________________________________________
                            For more ideas on business or to send this book to
                            members of your team:
                            www.youpublish.com/ideas
                            To contact the authors for a speaking engagement:
                            speaker@youpublish.com
                            ___________________________________________




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